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The City of Chicago v. Marshall

United States District Court, N.D. Illinois, Eastern Division

November 27, 2017

The City of Chicago, Plaintiff,
v.
Marilyn O. Marshall, not individually but solely as the trustee of the bankruptcy estates of Chester B. Steenes, et al. Appellee.

          MEMORANDUM OPINION AND ORDER

          Elaine E. Bucklo, United States District Judge.

         In this consolidated bankruptcy appeal, the City of Chicago seeks reversal of the bankruptcy court's decisions, in two separate orders affecting seven individual cases, of the City's motions under § 503(a) of the Bankruptcy Code for allowance and priority payment of the respective debtors' post-petition traffic fines as administrative expenses. For the reasons that follow, I affirm the decisions of the bankruptcy court.

         I.

         The facts underlying these appeals are straightforward. On various dates between 2013 and 2016, each of the seven debtors filed a petition for bankruptcy under Chapter 13 of the Bankruptcy Code. Thereafter, the debtors incurred fines as the registered owners of vehicles involved in parking or traffic violations of Chicago's Municipal Code. In each bankruptcy case, the City sought payment of the outstanding post-petition traffic fines as administrative expenses pursuant to § 503 of the Bankruptcy Code, which, pursuant to § 507(a), would give these claims priority status (second only to domestic support obligations), ahead of pre-petition creditors in the distribution of the assets of the bankruptcy estates. See 11 U.S.C. § 507(a)(2). Six of the present appeals challenge the oral ruling of Judge Barnes, who denied the City's motions at the close of a collective hearing on March 23, 2017.[1] The seventh appeal is from the July 20, 2017, written decision of Judge Hollis, who denied the City's substantially identical motion in a separate case.[2]

         Before the bankruptcy court, the City argued that seeking payment under § 503 was the only avenue available to it for enforcing the post-petition traffic fines. The City explained that the automatic stay prevents it from proceeding through its ordinary regime of progressive sanctions, in which the City tickets, immobilizes, tows, and ultimately sells or destroys vehicles involved in traffic violations. Compounding the problem, the City argued, is that the confirmation order entered in these cases (as in most cases in this district) overrides the default provision in Chapter 13 cases that confirmation of the bankruptcy plan vests the estate's property in the debtor. See 11 U.S.C. § 1327(a) (“Except as otherwise provided in the plan or the order confirming the plan, the confirmation of a plan vests all of the property of the estate in the debtor.”). Indeed, the confirmation orders entered in these cases provide: “All property of the estate, as specified by the [sic] 11 U.S.C. section 541 and 1306, will continue to be property of the estate following confirmation...” In re Haynes, 569 B.R. 733, 741 (Bankr. N.D.Ill. 2017) (alteration in original).[3] The City argued that because the vehicles remain the property of the estate for the duration of the bankruptcy (which may be three or five years), and because the automatic stay shields the estate's property from the City's progressive enforcement regime throughout that period, fundamental fairness mandates that the City be allowed to collect the post-petition traffic fines as administrative expenses.

         Judge Barnes rejected the City's argument, concluding that the City's claim “runs contrary to the policy of the fresh start, ” which mandates that “[c]laims prior to the petition date are dealt with in the bankruptcy case, claims after are not.” Tr. of Bankr. Order at 4. He found that the City's attempt to collect post-petition fines as administrative expenses had “a dangerous irritative effect, which is that the debtor could continue even after the first administrative expense claim for the life of the plan to incur additional tickets and they could be added to the plan, ” depleting the assets available to unsecured creditors. Id. at 8-9. Judge Barnes concluded that “the traditional set of circumstances holds true, which is the debtor remains responsible for these claims, ” and that the City had the same collections options as any post-petition creditor: it could move for relief from the stay and pursue state court remedies, or it could seek dismissal of the bankruptcy case. Id. at 9-11.

         In Haynes, Judge Hollis denied the City's motion in a written opinion. She concluded that the post-petition traffic tickets did not qualify as administrative expenses under Matter of Jartran, Inc., 732 F.2d 584 (7th Cir. 1984), and she declined to extend the alternative framework of Reading Co. v. Brown, 391 U.S. 471 (1968)-the City's foundational authority-to the facts of this case. 569 B.R. at 740. Nevertheless, Judge Hollis considered whether the City had satisfied the test for recovering administrative expenses under Reading and concluded that it had not. Finally, Judge Hollis rejected the City's argument that 28 U.S.C. § 959(b) mandates administrative expense treatment of the City's claims.

         On appeal, the City echoes the arguments it raised below, adding the overarching theme that the bankruptcy court's decisions effectively immunize the debtors' estates from the law. The City also assigns specific errors to the bankruptcy courts' analyses and urges me to hold that under Reading, its claims for payment of post-petition traffic fines should receive priority as administrative expenses.

         II.

         Administrative expense claims are governed by § 503(b) of the Bankruptcy Code, which provides:

(b) After notice and a hearing, there shall be allowed administrative expenses ... including-
(1)(A) the actual, necessary costs and expenses of preserving the estate, including wages, salaries, or commissions for services rendered after the commencement of the case[.]

11 U.S.C. § 503(b)(1)(A). Claims are entitled to administrative expense status only if they comport “with the language and underlying purposes of § 503.” Matter of Jartran, 732 F.3d at 586. To satisfy that standard, a creditor ordinarily must establish, by a preponderance of the evidence, that the claim: 1) arises from a transaction with the debtor-in-possession; and 2) is “beneficial to the debtor-in-possession in the operation of the business.” Id. at 587. This test reflects a primary objective of the administrative expense priority, particularly in Chapter 11 cases, of incentivizing creditors to extend credit to bankrupt businesses so that they can carry on operations during reorganization in hopes of maximizing assets available to creditors. See In re Resource Tech. Corp., 662 F.3d 472, 476 (7th Cir. 2011).

         In Reading v. Brown, 391 U.S. 471 (1968), however, where the post-petition creditor was not a voluntary creditor of a bankrupt firm, but rather a victim of the bankrupt estate's negligence, the Court fashioned a different test premised on the fundamental statutory objective of fairness in bankruptcy. Id. at 477-78. In view of that “decisive” consideration, the Court concluded that tort claims arising from the continued operation of a ...


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